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Microsoft (MSFT): review of analyst meeting highlights




Griffin Securities, Inc.


20 Sep 2013





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Our summary of the 2013 analyst meeting is as follows: Microsoft is undertaking a logical and potentially incrementally valuable product & technology strategy – namely to integrate or “intertwine” critical technologies across its portfolio, e.g., Bing, plus gaining share in newer markets where it has been poorly represented – with an evolving business model aimed at increasing the contribution of ratable revenue sources, including services – for which Microsoft has the resources and technology to invest in and offer the necessary scale. We reiterate our Buy rating. As anticipated, it introduced new reporting segments (five, as before), though the old segments will still be reported with 1Q14 results. There was a particular focus on “gross margin” as a critical metric; some high-margin segments, such as what is now MBD (the highest margin segment), may see margins trend lower but with offsetting faster revenue growth and therefore more absolute gross profit (in our current model we’ve been able to model gross margins and expenses by current segment. See page 3 and Charts 1-9). There was, predictably, no update on the CEO search; we liked the new CFO’s candor and focus on execution and accountability. The intermediate focus areas are: growing Office 365 & Azure (with much discussion around the user growth trajectory for each, user mix, addressable market and competitive issues for each); Windows PCs (as in ensuring that they remain an essential productivity device of choice); mobile devices (of course); and, innovation in high-value activities (which reminded us of the focus area presentation at the 2011 meeting and the subsequent presentations, at, for instance, the BUILD conferences). There was no change in the FY14 expected operating expense range and we are not revising our estimates at this time; Microsoft will host a call on September 26th to review the new segments in depth.

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